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What’s Old Is New Again

In a marketplace dominated by unconventional explorers, Australian oil producer TTE Petroleum is finding conventional drilling success on South Texas’ salt domes.
BY LEN VERMILLION

Somewhere between the mosquitos and the water moccasins in a remote field in South Texas lies an opportunity. You might want to watch your feet and wear long sleeves, but with a bit of experience, reasonable expectations and a knack for networking, you can find drilling success.

TTE Petroleum Ltd (formerly Titan Energy) might be a small independent headquartered in Perth, but what it lacks in size, it more than makes up for in oil and gas experience and sheer will power. The company made its way across the Pacific Ocean to the heart of the U.S. oil and gas industry—Houston, Texas— and set up shop.

So far, so good.

“Things are working right. It’s nice when that happens,” said TTE CEO Brad Simmons, a Texan with a colourful turn of phrase and a plethora of oil and gas experience. He became TTE’s Houston based chief executive a little over a year ago after retiring from Maverick Drilling in October 2013.

“We’ve hit a responsive chord with energy investors who are reacting favourably to our sentiment about drilling,” he continued. “We have no fear relative to a lot of our counterparts. We’re either going to be right, or we’re going to look like real idiots someday.”

Right now, things are going splendidly for the small group of Australian explorers and American associates drilling on salt domes south of Houston. The company just announced the acquisition of its fourth holding in the area, on the Blue Ridge salt dome in Fort Bend County, Texas, about 32km south of Houston. TTE acquired 361 net acres from OXY USA Inc.

“I am very familiar with this property. I had leased a portion of this acreage almost 30 years ago where I drilled around 20 successful wells,” said Simmons, who refers to the acreage as an “old friend”. “This part of drilling fairway had been held by production for over two decades and was unavailable for lease. While there was competition from other oil companies, TTE prevailed.”

The acquisition comes after TTE announced a series of successes in expanding its other holdings in the Allen Dome, Markham Dome and Boling Dome. But the company’s growing presence in Texas is only part of the story.

Seizing the opportunity
TTE is only undertaking conventional oil drilling on the salt domes and isn’t interested in unconventional plays.

“We identified in mid-2014 that there are enormous opportunities in U.S. conventional oil and gas exploration,” said TTE’s managing director, Paul Garner, an Australian who logs a lot of airline miles shuffling backand- forth between Perth and Houston. He is also the largest single shareholder of TTE. “The focus on non-traditional oil and gas has created opportunities in the old traditional fields, which have almost been abandoned by the large players in the industry.”

Garner said there are several reasons that these fields have been left behind, but none more than the fact that most companies only seek big payouts.

“Big money chases big money. Companies went with the herd and are not interested in chasing the smaller opportunities that are out there in the marketplace. They would rather spend billions on developing large unconventional fields,” Garner said. To be sure, TTE Petroleum is not a big money operation compared to many other explorers in Texas. But that’s where experience pays off. Garner has spent 35 years in the properties and equities market and has served on the boards of multiple oil and gas companies. Simmons
knows the lay of the land, having been a driller on the Gulf Coast for more than three decades. They both share the task of running and growing TTE.

“We began expanding our holdings both in Allen Dome and beyond at the end of 2014 and into early 2015,” Simmons said. “We have continued this process throughout 2015 by doubling our holdings in Allen Dome and expanding into major holdings in two more salt domes on the Texas Gulf Coast—Boling Dome in Wharton County and Markham Dome in Matagorda County. We just announced a major increase in our holdings on Markham Dome.”

The past two years have been full of milestones for the company, but Simmons points to the establishment of a major joint development agreement with institutional energy partner Gulf South Holdings of New Orleans as a key to the company’s progress. The deal ensures TTE will be drilling for the next three years with a budget of approximately US$75 million, subject to market conditions. “Thus far, there has been no variance by our partner from that plan,” Simmons said.

Under the deal, TTE receives a management fee of between US$50,000 to US$100,000 per well drilled to oversee and operate the project from cradle to grave. In addition, TTE receives a free carried 25 per cent working interest for the life of the well.

Garner agrees that the Gulf South deal is a game changer for the company.

“Look, we both need the same thing, to find and produce oil economically. However, the key drivers are mutually compatible. TTE needs capital, and Gulf South needs access to low-cost development wells and an expert drill team,” he said. “Sure, any oil company would like to drill 100 per cent working interest wells and bank all the production, but following this joint development approach, we’re avoiding the need to tap shareholders for capital to drill the next well.”

Garner also said that Gulf South needs access to a pipeline of investment grade projects, giving the company’s investors a long-lived continuous distribution, which, in turn, brings in more funds. TTE will leverage its share of these funds to grow the operations.

On his one-year anniversary as CEO, Simmons sent a message to shareholders and addressed the company’s forward strides in the face of declining oil prices.

“It’s been quite a headwind to have faced throughout this year. For those of our peers with unconventional projects, heavy debt and declining production it has been a bloodbath that continues,” he wrote. “We have nevertheless kept our focus and conducted nine months of continuous drilling and recompletion operations when most companies are electing to sit and wait.”

Simmons is confident that now is the time to move forward. “My instinct is that there is more upside ahead than downside,” he said. “It’s time to start entering the market.”

And so the company continues to drill while using the down market to its advantage since lower service and equipment costs have made for lower operating costs—a big factor for what Simmons calls, “one of the smallest producers on the boards.”

Efficient operations
On a hot October day, Oil and Gas Investor Australia was given access to TTE’s Allen Dome operations. It was here, about an hour’s drive south from Houston, that TTE, which began as Westralian Gas & Power Ltd in Perth, put its boots in the sand, or rather, salt, in Texas. It is also here where one gets a taste of the efficiency of TTE’s operations.

“As a small company, we all wear a lot of hats,” said Luke Velterop, TTE’s operations manager for its Gulf Coast sites, and one of three Australians working for TTE in Texas.

As Velterop drives down the remote road the company maintains to access its Allen Dome operations he points out the opportunities TTE has found— with a lot of help from Simmons’ vast connections and the ailing oil and gas economy— to obtain contract rigs and services at incredibly low costs.

“A small independent must take advantage of any element that helps move the percentages of success,” Simmons adds. “Prices for technical tools such as directional drilling and 3-D seismic, along with the staple components such as drilling rigs, wireline logging and completion services, have dropped dramatically. Economies of scale come into play, thereby making drilling when oil prices are low still very economical for us when others cannot afford it.”

Pulling up in his pickup truck, Velterop meets with another Aussie, Rick Newick, who he and Simmons both say was brought to Texas to lead field operations along with a few Americans Simmons has worked with for years.

They all have assimilated to the Texas oil patch way of life, which is 18- to 20- hour days, no vacations and no days off, for the most part.

“When you invoke the attitude that you start going out of business the first day you produce a well— you had better attack and grow your business every day,” Simmons said. “Replacing the oil you produce, times some multiple, had better be your motto if you are going to be an independent in Texas (or the rest of the world for that matter).”

While longhorn cattle roam in nearby fields and stew cooks in the trailer office, testing of the JT Reese continues with a handful of crew and a rig provided by Ranger Energy Services. At nearby Rosalee-5150, Encore Drilling set production casing and has commenced drilling Rosalee-40.

They are redrilling between historical wells, many of which were never exploited. Operating from old records, and experience, TTE has identified several drill sites it believes will produce. And, it has already recorded a number of successful finds.

Simmons said that TTE has only scratched the surface in Allen Dome, which covers about 3.2 sq km.

“The goals for Allen are to find every barrel of remaining oil surrounding this hill,” Simmons said. “With the addition of 3-D seismic, we have made huge strides relative to the ‘old school’ approach of ‘drill and hope’. New structures have been identified. We will be testing them in 2016. Some may be incredible, and some will be dry. It goes with the territory.”

Simmons estimates that there could be 100 to 200 wells on the hill to drill before TTE is through. At 40 to 50 barrels per day, that could add up to a few thousand barrels or more of sustained production if successful.

“The great thing about salt domes is that they can continue to give you additional sands farther and farther out on the flanks that have been overlooked or underexplored in the past,” he said. “We are still evaluating and trying to unlock its secrets through further drilling. This is the exciting part of developing a field.”

Going forward
Simmons knows from experience that fundamentals are the key to sustained growth and longevity. The oil business is full of successes and failures every day, and one must be able to go with the flow, so to speak.

“We have fought through tough drilling conditions this year such as banging through 300m to 450m of cavernous rock overhang that is full of crevices and high-pressure salt water and salt that makes drilling a real bear,” Simmons said. “We also deal with some of the most prolific thick swarms of mosquitos down in that sawgrass that sometimes require wearing bandanas all the time to avoid inhaling them! Throw in a bumper crop of water moccasins and alligators in the neighbourhood and all the ‘romance’ of what we do goes away pretty quick.”

In addition, occasional floods can wipe out roads and make moving 40- tonne pieces of equipment around in gumbo soil a real challenge.

“Sometimes the eggheads that sit back in their offices and call themselves oil men have not one clue of the real world out on the front lines,” Simmons, a frequent visitor to TTE’s field sites, said.

That’s why the company believes practicing proper field fundamentals is the key to growth.

“Several years ago I toured a massive downtown Houston headquarters [Enron] with a legendary Houston oil wildcatter that had invited me along. He pointed to the rows of ‘desk jockeys’ sitting in front of computers while up in this ivory tower and said to me, ‘These people don’t know anything about oil except that it is an electronic impulse on their screens. This company has lost its way. It has forgotten it took crazy rascals like us to find the oil and build this company and it has lost touch with its roots—and when that happens the end is near,’” Simmons said.

“All of the majors were built from tadpoles just as entrepreneurial and eccentric and dedicated as TTE, and the hundreds of thousands of jobs and industry created later all stem from just what we do. Some get luckier than others—and in our business, the harder you work, the luckier you get.”

Simmons also knows that economics are different when oil is even US$40 to US$50 per barrel versus when the old timers were drilling for 10 cents or US$2 per barrel.

“We find places where costs of testing for the remaining reserves justifies taking the shots. If we find, through drilling pilot development tests, that additional reserves of commercial quality are there, we drill and produce those reserves as economically as possible,” he said. “Creating value through steady disciplined development of many wells rather than one big one makes sense for our shareholders. They have seen way too many of the ‘one shot wonders’ and these days ‘safe’ looks pretty good.